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Key Findings

The Context

• Productivity growth has declined since the Global Financial Crisis
• Changes in global trade and technologies are challenging countries¡¯ key engine of growth ¨C export-oriented manufacturing, and
• The COVID-19 pandemic and other shocks, including climate change, are accelerating the need for new modes of production.

The Challenge

• Although the region has experienced some noteworthy successes, most countries in the region (except for China) underperform on several key indicators of innovation.
• And while countries have narrowed the gaps with advanced economies in the initial adoption of new technologies, they are falling behind in the broad diffusion and use of those technologies.
• Moreover, there is significant heterogeneity in innovation performance across in the region ¨C between countries and within countries, across sectors and firms.
  • Innovation appears more prevalent in manufacturing than in services, even though services are increasingly important to the region¡¯s economies, including as inputs to manufacturing.
  • Most firms remain far from the technological frontier, and only a small share of firms engages in more sophisticated innovation activities, including cutting-edge research and development.

What do we mean by ¡°Innovation¡±?

• People commonly associate innovation with breakthroughs at the technological frontier, and such breakthroughs often capture the imagination of policymakers and the media. 
• defines innovation more broadly, however, to include both ¡°¾±²Ô±¹±ð²Ô³Ù¾±´Ç²Ô¡± (i.e., developments that push the technological frontier), and the ¡°»å¾±´Ú´Ú³Ü²õ¾±´Ç²Ô¡± and ¡°²¹»å´Ç±è³Ù¾±´Ç²Ô¡± of existing technologies and practices that result in significant improvements in the ways firms produce or operate.  Diffusion and adoption are well-suited to the capabilities of the vast majority of firms operating in developing East Asia.

What inhibits innovation?

New evidence shows that several factors impede innovation in the region.

• Firms often lack adequate information about new technologies and high uncertainty about the returns to investment in innovation
• Firm¡¯s innovation capabilities, including management quality, are often weak
• Firm employees frequently lack the skills needed to enable innovation
• Limited financing options hinder firms¡¯ ability to fund innovation projects, and
• Countries¡¯ innovation policies and institutions are not aligned with firms¡¯ capabilities and needs.
  • They favor invention over diffusion and adoption
  • They favor innovation in manufacturing over innovation in services, and
  • Links between national research institutions and private sector firms remain weak, as do incentives for research institution-industry collaboration.

What will it take to spur innovation in the region?

To spur greater innovation ¨C both diffusion and invention ¨C country policymakers need to

• Reorient innovation policy objectives to
  • Promote diffusion and adoption of existing technologies, not just invention
  • Support innovation in the services sectors not just in manufacturing
  • Invest in building firms¡¯ innovation capabilities

A key objective of innovation policy should be to increase the number of firms engaged in any form of innovation ¨C diffusion, adoption, invention ¨C and progressively increase the share of firms transitioning from technology adoption to more sophisticated forms of innovation.

• Strengthen key complementary factors for innovation, including
  • Developing students¡¯ and workers¡¯ skills for innovation ¨Cstronger foundational skills as well as advanced cognitive, technical, and socio-emotional skills
  • Improving finance for innovation through continued capital market deepening and more diverse financial instruments to support innovation
  • Raising management quality
• Reform innovation institutions and agencies and strengthen their capacity through
  • Increasing institutional capacity to design and implement innovation policies
  • Improving governance of innovation institutions and agencies along with interagency coordination
  • Strengthening linkages between research institutions and firms, including incentives for research institution-industry collaboration.

The term ¡°developing East Asia¡± refers to the 10 middle-income countries covered in this study: Cambodia, China, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, the Philippines, Thailand, and Vietnam.